Asset Allocation

[lucasrd]

My wife and I are dual income, one kid. She is 28 and I am 27. She makes about 88K/yr and I make about the same. Our monthly take-home each month is about $9800.

Here is where we're at:
Monthly expenses: $3801 (includes $800 in misc and spending money)
Left to save/invest each month: $6096

Balances:
401K: $47,000
Cash: $60,000
Mutual Funds: $75000 (Moderate-Aggressive at Ameriprise)

Monthly Investment Plan
8% into our 401Ks.
$750 into Mutual Funds at Ameriprise
$750 into Aggressive Growth/Value Funds at TD Ameritrade
$4596 into ING Direct Money Market/CDs

My question is they say people our age should have about 80-90% in stocks. With our high income I just don't feel comfortable putting that much into stocks. Do you guys think the above plan is too conservative? How would you invest $6K/month differently?

We have a house on 10 acres and probably won't think about building our dream house for at-least another 10 years.

I've been going back and forth in my head thinking that's too much cash to save each month and have been looking at some different mutual funds. Some index funds and some a bit more aggressive.

Any feedback would be appreciated.

[Scanner]

With our high income I just don't feel comfortable putting that much into stocks. Do you guys think the above plan is too conservative? How would you invest $6K/month differently?

There's no right or wrong answer to "investment tolerance." It's like "pain tolerance" - some people have a high one and others have a low one.

Yes, I do think you could be doing better than sticking that money in cash investments.

Your wife and you are in a high tax bracket.

Consider buying muni bonds for a position in your portfolio vs. cash. You'll get around 3-4% interest and the fact that it's tax-free, it will make the effective yield around 5-6.5% since you guys are in a high tax bracket.

You can ladder the muni bonds like CD's so you have access to your prinicipal at different times/different maturity dates.

I would do things differently than you but you are not me and I"m not you.

[lucasrd]

how/where do I buy these multi bonds? I've also heard about insured municipal bonds? Any info on how to invest in the bond market would be helpful.

[Scanner]

A bond broker is a good place to start.

If you don't want a full service broker with a commission associated, then you can use a discount brokerage like Charles Schwab.

Yes, muni bonds can bought insured or uninsured. (Some municipalities have been known to go bankrupt). You lose about 1% for the insurance on principal.

Buy the muni bonds in your own state of residence to receive tax-free income for state and federal. If you buy them out of state, my understanding you get the federal exemption but not state.

If you are uncomfortable with buying bonds yourself, you can go with a muni bond fund but you will have market risk and principal risk with that.

You know, I am not sure of one thing though - how interest is distributed. Some bonds are "zero coupon" meaning you get everything - principal and interest - at the end. Some bonds you pay interest as you go along, others principal and interest.

[jIM_Ohio]

Originally Posted by lucasrd

My wife and I are dual income, one kid. She is 28 and I am 27. She makes about 88K/yr and I make about the same. Our monthly take-home each month is about $9800.

Here is where we're at:
Monthly expenses: $3801 (includes $800 in misc and spending money)
Left to save/invest each month: $6096

Balances:
401K: $47,000
Cash: $60,000
Mutual Funds: $75000 (Moderate-Aggressive at Ameriprise)

I've been going back and forth in my head thinking that's too much cash to save each month and have been looking at some different mutual funds. Some index funds and some a bit more aggressive.

Any feedback would be appreciated.

First- you should be commended for being able to save 66% of your gross pay. Excellent job!

Second- risk is all relative. I am 34 yo and am 98% equity and 2% bonds. You will see older people than me being more aggressive, and younger people being more conservative. You need to be comfortable with the risks you take.

Here are some comments-

I saw no mention of asset allocation with current accounts. Why Ameriprise? I think that company charges a 5% load or has some excessive fees. Can you shed some light on this?

I saw no mention of AGI. Adjusted Gross Income. AGI determines certain tax breaks for investing. If you send more than 8% to the 401k (yearly max of $15,500 for each spouse) it will lower AGI. Consider doing this. Check your AGI when you do taxes later in 2008.

I saw no mention of retirement goals. Are you interested in retiring by age 40? At your savings rate it is possible.

Back to a discussion of risk tolerance:

First issue, if you are concerned about market risk and a roller coaster ride, the more time elapses, the more smooth the ride. Time reduces risk. The longer money is invested, the more money you make from being invested. Time in and of itself reduces your risks.

We also assume the risk you refer to is the idea of watching balances of accounts go up and down. If I could convince you the value of your accounts only would go up, that wouldn't sound too risky, would it?

Second, I am about to throw out lots of numbers, if you get lost in them tell me to settle down, OK?

If you were to go 100% equities and only invested in one fund, that is a given level of risk. If you were to go 100% equites, but divide yourself up into 5 funds, that is a lower level of risk. 8 or 9 funds might even lower risk even more. All 3 scenarios were 100% equity, but risk can be reduced by picking funds which have little to do with each other (check my blog for detailed info).

Consider 80-20 (80% equity, 20% bonds). If you only invested in two funds (one equity and one bond) that is a given level of risk. In my opinion this would be more risky than being 100% equities with 5 funds (meaning 5 all equity funds is less risky than one equity fund and one bond fund). But that is up for debate I am sure. So if you went 80-20, add a 6th fund to the 5 funds in the 100% equity position mentioned above.

Consider 60-40 (60% equity, 40% bonds). This is typically the model used for capital preservation or withdraw mode. The biggest difference to me between 80-20 and 60-40 is the 60-40 significantly lowers the percentages of assets in highly volatile (risky) investments (like Emerging markets, small caps and mid caps).


There is a thing called a morningstar style box- have you heard of this? Large growth, large value, mid cap growth, mid cap value, small cap growth and small cap value. Each category also has a blend (which is a mix of growth and value).

International investing would have a similar style box.

Bond investing has a similar grid (duration vs credit quality of bond, I believe). I am new to investing in bonds, so not sure of the style box for sure- I have seen one, I just did not learn it while reviewing funds.

Being young, I might suggest a portfolio of 75-15-10. 75% equities, 15% bonds and 10% cash. The only cash to consider is cash you are willing to invest if market goes down.

I might suggest an allocation of

30% domestic large cap (15% growth, 15% value or 30% blend)
10% domestic mid cap (5% growth and 5% value or 10% blend)
10% domestic small cap (5% growth and 5% value or 10% blend)
15% international large cap (15% blend suggested)
10% international small cap (10% blend suggested)
15% diversified bond fund (15% government and corporate) or 5% government/corporate, 5% domestic high yield, 5% foreign diversified)
10% money market (cash)

If you do value and growth for domestic I count 6 domestic funds, 2 international equity and maybe 3 bond funds. 11 total investment choices to manage.

If you simplify and use blend funds, I count 3 domestic, 2 international and 1 bond fund. 6 funds total. This is what I do to some degree.

Here's the key to 75-15-10. If the cash position ever makes up more than 10% of the porfolio (this would only happen if market tanked), then you need to BUY more of what is low. For example, if international small caps dropped 20%, it's possible the 10% position for this class is now only 8%, so use the cash to move the small cap position up to 10%. The cash position should still be 10%, the difference is the market drop and portfolio drop reduced how much cash 10% is.

The reverse is also true. If international large cap takes off and gives you a 30% return, you will need to sell off some of this to maintain 10% cash position (because if value of portfolio went up, the cash position might only be 8% of total). Sell some of the gain to maintain 10% of cash position.

This whole thing (buying and selling amongst existing holdings) is called rebalancing. Rebalancing is how I keep my 98% equity portfolio ride relatively smooth. Rebalancing is buying low and selling high, which also increases returns over time.

Over time you will see how big the roller coaster ride is. If you decide the roller coaster ride is not bad, you might choose to remove the cash position and buy more of the positions you have.

If you choose the value-growth plan, you may also see that value gives a smoother ride than growth (I also smooth out my 98% equity position by biasing many choices toward value and blend funds- even my growth funds are value oriented).

Ask questions as needed.

[jIM_Ohio]

OP should know my asset allocation is
43% domestic large cap (value)
15% mid cap (blend or growth)
15% small cap (blend or growth)
15% international large cap (blend/value)
10% international small cap (blend/growth)
2% bond (real estate, foreign, domestic, high yield in one fund)

I have a plan to make 1/3 of the domestic positions more aggressive and 2/3 of each domestic position the current holding. I will not do this until total amount investing exceeds 200k. I am at 160k right now (a 25% gain for 2008 gets me there for 2009).

[lucasrd]

We maxed out our 401ks last year..adjusted gross was about 122K and I think I owe 4K this year for taxes.

I don't know why Ameriprise. We had about 85K all in cash when we went with them. They charge 1.5% yearly. I'm in an actively managed account and there aren't loads on the funds i was told.

Here is the breakdown of what they have me in: I believe she just moved some stuff around for a few months because they were worried about a recession.

CASH EQUIVALENTS $5,680.00 7.92%
LARGE CAP STOCKS $40,784.28 56.89%
INTERNATIONAL STOCK $12,753.66 17.79%
LONG/INTERMEDIATE TERM FIXED $7,616.90 10.63%
HIGH YIELD FIXED INCOME $2,131.35 2.97%
INTERNATIONAL FIXED INCOME $2,721.71 3.80%

My wife and I want to have 100K in cash. We should have this by the third quarter in 2008. After that i need to know how to invest about 5K to 6K a month in the market.

I've also been thinking about getting some exposure into an aggressive growth fund (CGMFX) and an emerging market (VEIEX). I was thinking about maybe putting about 3K into each then adding $250/mo into each. I'd look to add one more slightly riskier fund here for another 3K and $250/mo (possibly DAGVX) which would put me at $750/mo

I'd be putting $750/mo into Ameriprise

That would leave me about 4K/mo to put elsewhere. so based on the asset allocations in my ameriprise account i don't think i need too much more Large Cap...where should I put it?

I have a moderate to high risk tolerance...I just want to be educated before I jump in.

[jIM_Ohio]

Originally Posted by lucasrd

We maxed out our 401ks last year..adjusted gross was about 122K and I think I owe 4K this year for taxes.

I don't know why Ameriprise. We had about 85K all in cash when we went with them. They charge 1.5% yearly. I'm in an actively managed account and there aren't loads on the funds i was told.

Here is the breakdown of what they have me in: I believe she just moved some stuff around for a few months because they were worried about a recession.

CASH EQUIVALENTS $5,680.00 7.92%

LARGE CAP STOCKS $40,784.28 56.89%

INTERNATIONAL STOCK $12,753.66 17.79%

LONG/INTERMEDIATE TERM FIXED $7,616.90 10.63%

HIGH YIELD FIXED INCOME $2,131.35 2.97%

INTERNATIONAL FIXED INCOME $2,721.71 3.80%

My wife and I want to have 100K in cash. We should have this by the third quarter in 2008. After that i need to know how to invest about 5K to 6K a month in the market.

I've also been thinking about getting some exposure into an aggressive growth fund (CGMFX) and an emerging market (VEIEX). I was thinking about maybe putting about 3K into each then adding $250/mo into each. I'd look to add one more slightly riskier fund here for another 3K and $250/mo (possibly DAGVX) which would put me at $750/mo

I'd be putting $750/mo into Ameriprise

That would leave me about 4K/mo to put elsewhere. so based on the asset allocations in my ameriprise account i don't think i need too much more Large Cap...where should I put it?

I have a moderate to high risk tolerance...I just want to be educated before I jump in.

You have some wants (goals) and pieces of a plan... what is the 100k for? When do you want to retire?

You say you don't want much risk (and are weary of a roller coaster ride)- or that is what I got from OP anyway- then you suggest CGM focus.

Investing without a plan, or at least without a map, would suggest you might make a wrong decision, bad turn or something similar. In addition, if this is a taxable account, we need to keep taxes in mind.

CGM Focus has been on my watch list for about 2 years. Here is my plan. Create a diversified and aggressive position within each asset class.

30% domestic large cap value, 10% aggressive large cap growth (probably Ultra Bull ULPIX)
10% diversified mid cap, 5% aggressive growth (probably CGMFX)
10% diversified small cap, 5% aggressive growth (probably MNSMX)
15% international large cap
10% international small cap
5% bonds (already diversified)

20% of a 200k portfolio is 40k. So 40k is a roller coaster ride and the other 80% is bumpy, but more smooth and consistent. I have the diversified position created, but I don't have 200k invested yet (I have 160k).

In your case you are jumping into the roller coaster ride without a full scale diversified portfolio being built. I think you need to rethink the portfolio construction piece before choosing the exact fund. The funds you have picked- CGM focus and emerging markets- will be the highest highs and lowest lows- and you could experience both in periods as short as 3 months.

My suggestion would be open an account with one broker (I don't see need to send S% to ameriprise and T% to Vanguard and U% to CGM), I would suggest using one broker and sending

x% to a domestic large cap
y% to domestic mid cap
z% to domestic small cap
a% to international large cap
b% to international small cap

I think you need to add to large cap and other holdings still. This is because 6k monthly contributions (72k per year) will easily pass the 401k (47k) and Ameriprise (85k) account values within 18 months of starting assuming market goes up and you chose good funds.

Go in with a plan, not an selection of individual funds and that problem is fixed. You need to know

what % of large caps do you want?
what % of mid caps do you want?
what % of small caps do you want?
what % of foreign do you want?
what % of bonds do you want?
what % of cash do you want?

once you have the plan, choosing the funds is EASY. And within 24 months I would think that 144k of contributions can keep this whole thing balanced and diversified.

In addition, this 72k is being put in a taxable account, which could affect taxes even more in 2009 and 2010.

[lucasrd]

Thanks for the input...I didn't necessairly say I don't want much risk. I said i know i'm being too conservative but as you said I don't have a plan which is why i'm being conservative.

The 100K is just a cash cushion my wife and I feel comfortable with. It isn't really earmarked for anything other than piece of mind.

I really like your allocation model:
30% domestic large cap value, 10% aggressive large cap growth 10% diversified mid cap, 5% aggressive growth
10% diversified small cap, 5% aggressive growth
15% international large cap
10% international small cap
5% bonds (already diversified)

The sticky point was do I build a completely separate portfolio from Ameriprise, or do I need to take into consideration my assets there when building my own? for example I have 40K in large cap with ameriprise...would I really need another large-cap mutual fund?

[jIM_Ohio]

If it were me, I would get out of Ameriprise entirely, but that's me. Whe I first chose where to invest, I made a bad decision and got out of that fund company after 3-4 years. I am much happier with T Rowe Price (where I choose to invest now) than I was with Strong funds (where I started).

If you keep Ameriprise, get that account aligned with the 40-15-15-15-10-5 portfolio. Because this account will be smaller, and taxable, I would tread on this lightly and move it over time.

Then use contributions to keep new brokerage account in line. I think you will find many funds which are better than the Ameriprise offerings. Lower cost for the same performance, or even better performance.

Each of my porfolios is seperate (my 401k has this allocation, wifes does too, my Rollover IRA has this allocation, and my Roth IRA has the same allocation). We were in a situation where my wife's 401k changed 4 times in 8 years, my 401k changed 4 times in 8 years and it was too much to track when to buy more of one class in one account and sell so much of another class in another account.

So each account has the same allocation. I can look at a single account statement and determine what rebalancing is needed without logging on to websites at Fidelity (her 401k), Vanguard (my 401k) and T Rowe Price (all IRAs).

[Scanner]

Lucasrd,

You wrote:

With our high income I just don't feel comfortable putting that much into stocks.

and

I have a moderate to high risk tolerance...I just want to be educated before I jump in.

I sense a "schism" here.

What JimOhio is proposing is a portfolio almost entirely of stocks.

Are you okay with that?

[lucasrd]

I think if I had a plan i'd be fine with it. Maybe I should have said I don't feel comfortable putting that much into stocks with Ameriprise

the plan Jim laid out gives me a great start as to trying to construct an asset allocation model for myself...I'm going to look at it and i'll post what I come up with..

Thanks to everyone for the great feedback

[Scanner]

JimOhio gives good advice.

If you have a moderate to high risk tolerance, ignore my post on buying muni bonds.

[jIM_Ohio]

I would second that what I posted was aggressive. It could be more aggressive, it could also be much more conservative or moderate. No one should do what I suggest without doing their own research.

Anything less than 20% in bonds is aggressive, and simply adding a fund here or fund there does not make the investment less aggressive (necessarily).

That being said, one reason I post what I invest in is so people understand I invest pretty close to the portfolio I suggest when I post.

[anonymous_saver]

If you make that much money, I would stop your investments at Ameritrade and increase your 401(k) contributions up to the max of $15,500 for each of you, each year.

Then since you are so good at saving, I would put the full amount into a Traditional IRA for both of you.

You are both young, I would definitely have more stocks. I don't understand your comment about having a high income and not feeling comfortable with stocks, that would be one reason that I would be comfortable!

What debts do you have?

[Scanner]

I would also give you a "pep talk" about stocks/equity mutual funds.

You are young, you are a high earner.

You have a chance to really accumulate some wealth over your lifetime if you get a little more aggressive with your portfolio. You are good savers; that much is evident.

You have to get comfortable with the idea of being an "investor."

When you are an "investor", it literally means you own things. You own some of Walmart, some of Pepsi, some gold, silver, some real estate, whatever. You will have some losses to deal with over the years for sure, some downturns. . .but I can see you guys ending up with some substantial wealth.

You just need to let go of the idea that you have to constantly guard yourself against a loss. Go for mutual funds to start and then you can speculate.

Good luck.

[jIM_Ohio]

Originally Posted by Scanner

You just need to let go of the idea that you have to constantly guard yourself against a loss. Go for mutual funds to start and then you can speculate.

Good luck.

And to add, time will probably teach this lesson. The key is to get started. Even if OP starts more conservative, then realizes they CAN take more risks after some wealth is built up makes sense.

[atomicrc11]

A Traditional IRA is out of the question, as the maximum AGI to make a partial contribution is $61,999. This is the case as both husband and wife are eligible for employer sponsored plans.

A Roth IRA is possible, as the maximum AGI stated above is $122k, and the maximum AGI for a full contribution is $150k. It phases out from $150k-$159,999k. If you can, definitely stash some cash in a Roth, as you cannot put any more into your 401k, but all your earnings will grow tax free in your Roths. You can put a maximum of $5k in your Roth and a Roth in your wife's name for a total of $10k each year.

[jIM_Ohio]

Originally Posted by atomicrc11

A Traditional IRA is out of the question, as the maximum AGI to make a partial contribution is $61,999. This is the case as both husband and wife are eligible for employer sponsored plans.

A traditional IRA has no income limits, does it?

A traditional IRA has a tax deduction limit (which I think is the $61999) and other qualifiers (not covered by employer plan and other criteria). But anyone of any income level (provided they have EARNED INCOME) can contribute max to a traditional IRA to get tax defferred growth on contributions. $5000 for under 50, $6000 for over 50.

Please correct me if I am wrong.